Are landlords Evil? Am I Evil?

I was just listening to the CEO of Princeton property management (talk at an annual apartment management meeting).
She has switched all their leases to 6 months so she can put in raises more often. Limiting raises to once a year is less profitable in a rising market, but less ethical I think . Since the typical stay in our apartments is 18 months, if we do annual raises, people can leave more or less as a normal part of their lives, if they choose not to pay higher rent. Our expenses are actually up pretty mcuh in line with our rent raises this year (percentage-wise - and that's mostly water & taxes). And our rents still aren't up to where they were in 2008. When our rents collapsed 15%, tenants do not volunteer to pay more. So it's not a completely one sided thing.

So, as far as landlording goes, we're not evil. Not paragons of charity (or humanity) maybe. But not evil.
I do think it's important to think about that now and then.

My guiding gut check: I saw a documentary on Chinese workers. They could barely survive and were treated horribly.
When they talked to the manager, he said that's where the market was. If they didn't follow, they'd be swallowed by the competition.
So sometimes the market is evil. Following the market can make you do evil things.

I think our moral imperative has to be to provide a nice place to live and not to squeeze people unreasonably. With some exceptions, I think 6 month raises are unreasonable. I think raising rents just to force people out is unreasonable (for example for the guys paying $1000 on when the market is $1270, we would make more money if we raised their rent $200/mo which would probably force them out (and still would be below market).

A lot of people think landlording is intrinsically evil. In olde timey economics, we're called "rentiers," and one of the founders of what they call modern classical economics (David Ricardo) flat out said that rentiers serve no social good. Where is the social good in simply owning property and charging people more than the expenses? The only answer I think is in creating nice places to live.

Look at publicly owned and rent subsidized housing. Inevitably the public overpays to build it. Typically the public pays nearly double what we pay per unit - and we have nice units!. Then it starts out new and fairly nice. But it is not maintained well and it is not improved. Eventually it's torn down or the public pays more than a new building would cost to have it remodeled.

That happens because the Government property managers have little incentive (except kickbacks sometimes). We have an incentive for improving our apartments. Higher rents. So we perform the social good of improving the overall quality of housing available to renters. Ultimately we cannot charge more than people are willing to pay. There are only so many places at the top. My long term goal for our properties is to be as close to the top as we can be while improving our return on investment. So that translates to investing back into the properties (about 40% of our income this year) and also raising rents if we can. That was a risky strategy because there are so many new Pearl units that have been converted rentals over the last 20 months (3000 units) and more units that were planned as condos that became rentals in the North & South West waterfront developments (another 1500 units). If there aren't enough high end renters who prefer us to them, we loose. Right now, most landlords have chosen simply to raise rents, but not invest much in the properties. So our choice add more insulation the buildings, improve the electrical systems, refinish floors, and so on isn't something everyone does. There's a complex in NW Portland - NW 24th - called Nob Hill Apartments. They're kind of like what Corbett used to be. Aluminum frame windows, gray carpeting. No real improvements beyond maintenance. Their rents last year for a studio were around $720. Now their at $820 or so. They're providing less expensive housing in an expensive neighborhood. It's clean and functional. A different choice.

So, anyway, I do think about this.

A third of All Workers Work for the Government in America?

Someone said to me at a BBQ that a third of the US Population work the the Government in America. Taking that to mean a third of all workers, it still sounds pretty impressive. Is it true though?

I poked around some figuring this had to be one of those statements that had been fact checked a hundred times on the web already, but I didn't find anything. So I checked the Census data. Look for yourself here.

So what are the numbers? State & Local about 17MM "full time equivalent" workers (so two half time people = 1 full time). You can follow the above link for the breakdown, but some highlights are 9MM in education, About a million police, about 1.5MM in transportation (highways, air, harbors...), about 1MM in hospitals. So that's most of it right there (for State & Local). 12.5MM of a bit under 17MM. Mostly stuff people would agree is necessary and even underfunded (police and education). The stuff that people generally associate with Govt waste -- Administration - is about 700,000. Two thirds of them are accountants and watchdogs. Which most people concerned about the budget probably would want to keep.

What about the Feds?
The Census says (as of 2009): About 2.8MM including part time (2.5MM full time).
700,000 in defense (gee -- smaller than I thought. But there are another 1.5MM reserves. And then there are civilian contractors who are not Govt employees.), about 500k postal workers, 300K in the dept of Homeland Security (includes Coast Guard, Customs, airport friskers etc). Hospitals (like VA hospitals) - 200K. Those are the biggest groups. That's 1.7MM of the 2.8MM

So that's about 17MM + about 3MM = 20 Million Govt employees in 2009.
The total US labor force (Bureau of Labor Stats) is around 150 Million.
20/150 = 13% (about 6.5% of the US Population) Not small but hardly 1/3rd.
Contractors who aren't Govt employees - but are paid by the Govt - probably account for another couple percent (3MM workers), but that's harder to get data for.

FNMA FHLMC - Why not Private?

For a LONG time, FHLMC and FNMA were quite profitable. They buy mortgages from banks, put their guarantee on them, and sell them for more than they paid in nice pretty Mortgage Backed Security packages with a big bow. They made money doing this.

So why can't the banks get together and create a genuinely private entity that does exactly the same thing? It'd make a profit (if they're honest about underwriting criteria) adn FNMA and FHLMC can be quietly retired. (FNMA & FHLMC are technically private, but effectively subsidized).

It might work.

But there are a couple issues. Getting started, of course, requires a certain critical mass (and capital to back potential losses - like any other insurance). The big white potato in the room is the implicit government backing. Even though FNMA & FHLMC are in the toilet, everyone still expects their insurance on existing MBS to be honored.
Because the US Govt will honor it.

So how can a private mortgage bundling entity achieve the same thing? It would basically have to be honest! The purchase price for mortgages that conform to their underwriting criteria would have to be enough to cover the risk!

Right now, huge banks like B of A could do this internally. They can swallow their own risk. Why pay a 3rd party? The only reason they don't is because they get such an awesome deal from FNMA & FHLMC. They sell the mortgage (off their books) so they can generate more mortgages, collect more fees and servicing, and they pay only a small amount for doing so. It's a market distortion.

That's the bottom line. Remove the market distortion of the Govt providing free insurance to FNMA and FHLMC and they will have to build a lot more capital for their imprimatur to carry the same weight (and achieve the same price for their MBS's ).
Then they would be on a level playing field with a truly private entity.